Financial markets are inherently volatile, characterized by shifting values, risks and opportunities. The prices of individual financial products are frequently changing for numerous reasons, including shifts in perceived value, localized supply/demand imbalances, and price changes in other sector investments or the market as a whole. Reduced liquidity adds price volatility and market risk to any contemplated transaction, and in the face of this volatility, Transaction Cost Analysis (TCA) has become increasingly important to help firms measure how effectively both perceived and actual portfolio orders are completed.
Several well-conceived TCA frameworks have evolved, but mostly for equities (e.g., stocks). These equity TCA frameworks rely on the market liquidity information that is available from equity exchanges. For financial products where market liquidity information is not readily observable, such as currency, there are few if any TCA solutions.
Currencies are not like exchange-traded assets. The currency market is fragmented, highly decentralized, and trades over-the-counter (OTC). This means there is no single institution that serves as point for liquidity aggregation and information dissemination. Instead, the market basically operates as a quasi-centralized network of dealers that includes major banks, broker-dealers and electronic communications networks (ECNs). In the currency market, dealers tend to manage their own order flows and closely guard them as proprietary information. Since most transactions in global foreign exchange are executed as private bilateral agreements, the terms of these agreements (i.e., transacted price and volume) are rarely revealed to other market participants. The result is a market rife with informational asymmetries, where liquidity is largely hidden from view.